Australia's economic lead appears to be slipping

The IMF now forecasts that our growth ahead will be lower on average than we have experienced for 20 years.

Reuters

Australia significantly outperformed other advanced economies over the past five years, and not just because of China. But with lower growth forecast, the challenge has been set for Joe Hockey, writes Greg Jericho.

Over the past few years Joe Hockey and others in the Liberal Party have been pretty eager to use slings and arrows against the view that the government intervention in the economy is worthwhile.

But now it seems we're all Keynesians again, as on Monday it was reported that the Treasurer is contemplating a stimulus to cope with slowing growth of the coming years.

Despite the belief in fiscal stimulus, the Treasurer remains critical of the Rudd Government's work. The Daily Telegraph reports that Mr Hockey has told Treasury that he doesn't want any spending like that which was done under the Rudd government during the GFC. Instead, he wants to see spending on infrastructure like "roads, rail and even airports".

He must be happy then to have read the recent report by the Grattan Institute's John Daley which noted that infrastructure spending overall, but especially on roads and rail, had increased in the past five years:

Mr Hockey might be less enamoured to hear John Daley's view that the "infrastructure deficit" is more myth than reality. Daley suggests that:

The only published evidence of a large 'infrastructure deficit' appears to be a long wish-list of the projects that engineering and construction firms would like to build.

But before we go cavaliering off towards the economic sunshine of roads of the 21st Century, it is worth remembering that we should not be too dismissive of the spending that happened in the past five years.

Recently the IMF released its updated World Outlook Report. The report at this point in time gives us the ability to have a decent look back and see how things went for Australia vis-a-vis the rest of the world.

In the past 30 years, Australia has as a rule performed better than the rest of the advanced economies in the world. The IMF's list of 34 advanced nations includes most of the OECD plus a few other European nations and Taiwan and Hong Kong. So it gives a very good spread of the big nations of the world economy - with a few notable exceptions like China (and its rather above average growth).

Since 1984, the only five-year block where Australia has not out-performed the other advanced economies was during 1989-1993, when the tail end of the 1980s saw our growth become not as strong as other nations, and then the recession of 1990-91 which put us below par.

But it is worth noting that the five-year period where Australia most outperformed the other advanced economies was from 2009-13:

If you believe that you need to judge things by the time in which they occurred, then despite the past five years having the second lowest five-year period of average GDP growth in the past 30 years, it is actually the period in which our economy performed the best.

Interestingly, this wasn't what was expected to happen. In April 2008, prior to the GFC subjecting the world economy to some 'enhanced interrogation techniques', the IMF predicted Australia's GDP for 2009-13 would average 3.3 per cent. This was slightly down on the preceding 10 years, but still very solid growth. At that point the IMF predicted the advanced economies on average would grow by around 2.6 per cent each year. Again slightly down on the previous decade, but still OK.

Suffice to say the IMF didn't see the GFC coming.

By April 2009 these estimations had been drastically revised down. Then Australia was expected to average growth of a mere 1.3 per cent annually, compared to the advanced countries struggling to get by on 0.98 per cent annual growth. What ended up happening is that Australia grew by 2.5 per cent on average, while the advanced economies of the world nations astonishingly performed worse than the IMF thought they would in April 2009.

But of course the counter is that we had to go into debt to achieve it. Well, yes, but again, despite the rather bizarre suggestions by some that Australia's debt increased by more than others, in reality, when using the level of gross debt as a percentage of GDP, Australia's increased by less on average than other major nations.

And while this might suggest Australia got some good bang for our stimulus buck, it is worth noting that some other countries did a bit better. While from 2007 to 2013 our GDP grew by 16.3 per cent, our general government gross debt increased from 9.7 per cent of GDP to 29 per cent - a 19.4 per cent of GDP increase.

Only 8 out of the 34 advanced achieved a bigger increase in GDP than in their level of debt as percentage of GDP:

But let us agree that Australia got through pretty well. One significant reason of course is that China held up better than the IMF thought it would in 2009 and 2010 - due to its own stimulus program which saw its gross debt increase 17 per cent of its GDP from 2009 to 2010. But since then China has actually performed worse than expected, and yet Australia continued to out-perform expectations.

However, the troubling aspect is that the IMF now forecasts that our growth ahead will not only be lower on average than we have experienced for 20 years, it will see the rest of the world catching up to us. Over the period 2014-18, the IMF expects Australia's GDP on average to grow by only 0.5 per cent more than the rest of the advanced economies.

It will be interesting to see when we check back in five years if Australia has done better than expected or worse, and how its performance compares to the rest of the world. For Joe Hockey, the challenge has been set.

Greg Jericho writes weekly for The Drum. His blog can be found here. View his full profile here.